The Fed and Treasury propped up the banking sector fearing that a collapse would choke the life out of the economy.  Credit had to keep flowing, or the economy would grind to a halt, and this was particularly true in the housing market.

Today, the banks are indeed making mortgage loans again, but not quite the way the government intended.  As the Wall Street Journal reports, “Banks Load Up on Mortgages, in New Way.”

Rather than use TARP funds to make mortgage loans, the newly risk-averse banks are instead using the funds to buy government-guaranteed Ginnie Mae bonds.  And they’ve been buying them by the truckload.  Read the rest of this entry »

FreedomWorks published a “Top 10″ list of reasons why our government economic stimulus plans won’t work: See list.

In particular, we liked point #2: “The Stimulus follows the same plan that ruined Japan’s economy”

 Japan, after a dramatic market crash and a drop in real estate prices responded with government spending not unlike what the US Congress is considering today. In fact, they had 10 stimulus bills between 1992 and 2000, spending billions on infrastructure construction, building bridges, roads, and airports as well as pouring money into biotech and telecommunications. While many countries enjoyed booming economies and falling unemployment during this time, Japan had a lost decade, seeing its unemployment more than double. They spent double the US level of GDP on infrastructure, and now have a lousy economy and have one of the highest national debts in the world.

Well said.  We’d like to add additional comments here, but frankly, there is much else to say.  Our current stimulus plans will not make an appreciable difference in an economy that is 70% consumer spending.  But they will saddle us with debts that will be with our children long after anyone reading this blog post is dead and buried.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

We’ve said it more or less nonstop for the past year: retail sales are in the toilet and have shown very little signs of recovery.  And in an economy that is 70% consumer spending, that is bad, bad news.

So, what have retailers done to spur sales?  They’ve really scraped the bottom of the barrel this time, launching the biggest “Christmas in July” promotion in memory.   Perhaps store props of Santa sitting in a beach chair are exactly what the American consumer needs to convince him to open his wallet again.  But let’s just say we doubt it.   When his son or daughter tugs on his shirt and asked for a $20 “Christmas” present, he might well oblige.  But he’s not going to spontaneously throw down $1,000 for a new mattress or flat screen TV.  Nor is he going to buy a car…or a house.  Or a jacuzzi.  Or any other large purchase that generally involves taking on more debt.    Retailers should probably save what dignity they have left and ditch the Santas wearing Hawaiian shirts.

Speaking of maintaining dignity, we had to laugh when we saw some of the government’s proposals for closing the budget deficit.  Writing for the Wall Street Journal, Jonathan Weisman reports that the Department of Justice will now save money by using both sides of the paper when making copies.  Other agencies have proposed e-mailing documents around the office rather than print and distribute by hand (what is this, 1998?).

Hey, we applaud the President making an effort to cut government waste.   This should have been done years ago.  But, as Weisman writes,  ”If the administration produces $100 million in savings every 98 days for the rest of Mr. Obama’s term, the savings will total $1.5 billion, or three days of interest on the federal debt.”

More efficient use of the government’s copy machines will not make any appreciable difference given the money currently being hemorrhaged.   How many copies do you have to save in order to equal one Medicare Part D?   Or one Obamacare?

Don’t bother doing the math…it’ll just depress you.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

Reuters reported today that “49,377 jobs had been ‘created or sustained’ by water, highway and public transportation projects” in June compared to slightly more than 21,000 jobs the month before.   Of course, 49,377 jobs in a country of over 300 million people is not much more than rounding error.  And it hardly makes a dent in the 467,000 jobs lost in June by the rest of the economy.

Yes, 10 jobs in the “real” economy are being lost for every 1 job purported to be created by government stimulus.  And at $338,000 of your tax dollars being spent for each job ($16.7 billion in projects divided by 49,377 jobs), this is clearly a losing proposition.  (We take these numbers directly from the Reuters press release).

The point that we have tried to make over and over again is that the government cannot spent us out of this recession.  Try as Congress might, all of the earmarks in the world cannot compensate for a sluggish consumer — who still makes up around 70% of the economy.

Faced with a long-term, deflationary downturn in consumer spending, Japan did throughout the 1990s what the President and Congress are attempting to do today.  They tried every form of stimulus under the sun…and in the end, they got very little return on their “investment.”  Today, Japan remains mired in its economic funk, but their government debt has reached over 200% of GDP — levels generally only seen in times of prolonged war.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy 

Paul Krugman wrote an article last week entitled That ’30s Show, in which he claims that the recent loss of jobs demonstrates beyond the shadow of a doubt that the stimulus is not big enough.  He further rants about lack of cooperation being unhindered by facts or logic, and takes to task other economists for perpetuating the myths of bad consequences stemming from “short term deficits”. 

I bring this up to ask a simple question.  Can stimulus spending fail?  Mr. Krugman and others are presenting an infallible approach to an economic problem - spend a lot of money.  Why infallible?  Because the claim being put forth is that the ONLY way for this stimulus to fail is by being too small.  That’s it.  No alternative. 

Nevermind that massive amounts of capital are sitting on bank books, unused.  Nevermind that the $168 billion (remember that little program?) sent to taxpayers last fall made hardly a ripple.  Nevermind that the extra $13/paycheck that so many now enjoy (too strong a word, I know) is being used to pay down or just service debt.  Nevermind that the rate of delinquency on loans (mortgages, revolving credit, installment) continues to go up as many consumers face the reality of being inescapably underwater precisely because they lived well beyond their means.

 It is obvious to Mr. Krugman and apparently anyone with synapses firing that we simply need to replace some of the lost private spending with government spending until…oh, that’s right.  There is no “until”.  There are only phrases like “back on track” and “return of consumer confidence”, but those words are misconceptions.

For stimulus spending to work it must, well, stimulate something.  Our current economic condition was brought on by a tremendous amount of personal consumption that was financed through borrowing, both collateralized (home equity) and uncollateralized (credit cards).  Home equity lending took the form of cash out refinancing, but a zero-down purchase is also something of a home equity loan, in that it allows the transaction of the home purchase but does not require the traditional 20% of purchase price saving by the borrower.

As Boomers went through their highest spending stage of life they did themselves proud, spending with abandon.  Financiers were only too happy to come up with new ways to feed the frenzy.  But times have changed.  The ever-increasing amount of debt we were willing to shoulder became too much.  The spenders are 1) tapped out, unable to take on another dollar of financial burden against future income, and 2) turning into savers, as they move to the next stage of life in which they, as empty nesters, prepare for retirement.  As this happens, there is no way around the fact that a reduction in debt means a reduction in consumption, which means a reduction in economic activity.

So we return to the notion of, “Stimulate what, exactly?”, because the only way to return to yesterday’s level of economic activity is through a return to ever-increasing levels of private debt.  Know anyone itching for a bigger mortgage?  Me either.

The stimulus spending will have an affect, no doubt.  We have already allowed states to return somewhat to their status quo by partially filling their budget holes, and we have allowed national politicians to feed the notion that there really can be “something for nothing”.  Unfortunately, we all know that these debts must be paid, and someday we will have to adjust to live within our means. 

It’s always interesting to get an international perspective on the state of American economic affairs.  Germany’s Der Spiegel published a rather scathing article on the United States’ fiscal management (”Chancellor Merkel Visits the Debt President“), outlining the Obama Administration’s “Five Errors.”   We’ve condensed Spiegel’s criticisms below (though we recommend you read the whole article):

#1.  ”The US amassed much more debt during World War II, it is often said. That, though, is not true. According to conservative forecasts, Obama’s policies could end up being three times as expensive as US expenditures during World War II.” Read the rest of this entry »

The Troubled Asset Loan Facility, the backstop offered to companies where the US government guarantees a portion of loans that are used to offer credit to consumers.  The demand on the part of lenders to access the government program has been anemic at best.  All of a sudden, it a appears to have quadrupled from $2.5 billion up to $10 billion.  The quick analysis calls for increased lending, increased credit extension, increased spending, and therefore economic recovery.  However, there is another point of view.

It could be that lenders (GE, etc.) are watching Treasury rates walk higher as well as a sudden interest in the US deficit on the part of previous Treasury bond buyers.  This bodes poorly for the value of the US dollar as well as future interest rate moves, which makes the sudden TALF access nothing more than a pre-emptive strike on the part of lenders to grab a bag of cheaper cash, whether they intend to use it quickly or not.

We couldn’t help but feel a tinge of nostalgia this morning when we read that General Motors would be discontinuing the Pontiac brand.   Our first car, as a 16-year-old, was a beaten-up old Pontiac.  

But, after reflecting for a moment on that car, it’s not hard to see why the brand ultimately failed.  Our ride was not a GTO muscle car, or one of the other gems from Pontiac’s storied past.  No, ours was a bland four-door 1984 Parisienne, which–apart from the Pontiac hood ornament–was completely indistinguishable from the also bland Chevy Caprice sedan.   Read the rest of this entry »

The New York Times informed us today that, for advertisers, “The Older Audience Is Looking Better Than Ever.”   

We’ve heard this before.  ”The Boomers are different.  They won’t stop spending.”  In a case of collective self-delusion, marketers decided that the Baby Boomers, like Peter Pan, would never grow up.  They couldn’t.  They were just too valuable. Read the rest of this entry »

We read in the New York Times that Russian Prime Minister Vladimir Putin has proposed revising the country’s 2006 “baby bonuses” to mothers who give birth to a second child (”Putin Stresses Tax Cuts to Revive the Economy“).   The Times wrote “The awards of about $9,000 had been restricted to use in making mortgage payments, or for use at stores selling products for young children, but the government relaxed them to allow mothers to make car payments with the money.  On Monday, Mr. Putin suggested that $300 of the bonus money would come with no restriction.” Read the rest of this entry »